Low Mortgage Rates Draw Buyers, but Banks Throw Up Roadblocks

RISMEDIA, July 26, 2010—(MCT)—David Kosowski has a full-time job, a sky-high credit score, a solid debt-to-income ratio and enough cash stashed away to put a 20% down payment on the three-bedroom, two-bath home he’s had his eye on since spring.

But when he applied for a mortgage to cover 80% of the $495,000 purchase price of the Coral Gables, Fla., home last month, he was flatly denied.

His story is one that has played out with head-scratching regularity across the troubled housing market, industry analysts say, even as mortgage rates have dropped to historically low levels.

The average interest rate for a 30-year fixed-rate mortgage sank to a record-low 4.56% this week, according to government-sponsored mortgage buyer Freddie Mac. Fixed-rate 15-year mortgages dipped slightly to an average 4.03%, also a record.

But even as rates fall, lenders are raising the bar ever higher for applicants, making it harder for even financially-stable home buyers to qualify, and in some cases making homes affordable only to those able to pay with cash.

Kosowski, who seems to have weathered the recession and the housing market downturn better than many—he’s employed and has considerable equity in the three-bedroom home he purchased 10 years ago—said his application was rejected because the company he works for (and owns a 25% stake in) saw its earnings drop between 2008 and 2009.

That was enough, he said, for the bank to turn down his loan application—despite his 817 credit score, a history of meeting all debt obligations and a 21% debt-to-income ratio.

“They asked me to explain the earnings decline,” he said. “I wrote a letter explaining that the economy had been down in 2009, and the next day they said the loan was denied. I was very surprised.”

Steve Schneider, his mortgage broker, and owner of Greenwich Title Services in South Miami, said he was surprised as well. “His credit is as good as anyone I’ve ever worked with,” he said. “He should’ve flown through.”

Such rejections would have been unheard of a half-decade ago, when credit was flowing freely, often to people who couldn’t afford the homes and condos they were buying, said Doug Dewitt, a Miami-based real estate broker.

“Now the pendulum has swung completely in the other direction, and lenders are making you very accountable in terms of your credit history,” he said. “It’s like they don’t want to write one more bad loan.”

With South Florida’s housing market still struggling to recover from record-high foreclosures, toppled home values and a glut of inventory, the ease with which banks now turn down applicants is nearly unprecedented, he added.

Potential borrowers are being denied access to tantalizingly low interest rates for reasons ranging from insufficient down payments, to a less-than-perfect credit history, to concerns about the property or buildings they hope to buy into.

The current interest rates are so desirable because they translate into significant savings in monthly and total payments for home buyers. For example, someone getting a $250,000 home loan in July 2010 would save an average of about $155 each month, compared to someone getting a similar loan last July, when the average 30-year fixed interest rate was about a percentage point higher.

Mortgage lending in 2010—down about 50% from early 2009—has shown a complete 180-degree turn from the home lending practices that reigned before the housing market bubble burst, and represents yet another obstacle stalling a recovery in the housing market, those who track the industry say.

Kosowski had very little trouble getting a loan for the home he bought back in 2000, when his income was lower than it is today. As he looked to move into a bigger home this year, the stack of paperwork he had to fill was considerably thicker than it was 10 years ago.

“It’s night and day,” he said, comparing the two loan application experiences. “I had to give about a quarter of the information that they ask for now, my income was significantly less than it is now, and there was no problem getting a loan. It’s almost like they don’t want to lend.”

The low-interest rates have done little to spur activity in the housing market. Last week, the number of mortgage-loan applications for home purchases dropped to its lowest level since the 90s, the Mortgage Bankers Association found. Nearly four out of five applications were from existing homeowners looking to refinance, many of them rejected because of insufficient or nonexistent equity.

Despite prices that have fallen drastically in the past five years, traditional home sales to traditional, middle-income buyers have been pushed to the margins.

With the expiration of the federal home buyer tax credit and many still worried about losing their jobs, the stiff lending requirements of banks offer up yet another reason for the average person to not buy a home.

Kosowski, who works for a lighting manufacturing company, ended up paying cash for the Coral Gables home in June, and is hoping to get a refinance loan soon.

Greg McBride, senior financial analyst for Bankrate.com, predicted that mortgage rates would remain low for the foreseeable future, but it will take more than low-rates to spur a recovery.

“Low mortgage rates alone are not going to revive the housing market,” he said. “People are still nervous about their jobs, and reluctant to take the plunge into home ownership. And the market continues to be plagued by a very high level of distressed properties.”

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